I am considering purchasing an investment property (residential unit) through my self-managed super fund. I have heard about the tax concessions available through the SMSF, but with superannuation of just over $100K, I’d like to know if the costs involved in setting-up the SMSF (and running it) will be worth going ahead with. 

Whilst SMSFs can be great, they are not ideal for everyone.  Before you establish one you should think carefully about some of the following issues:

• if you want to purchase property via a SMSF, the initial establishment cost can be up to $3,000;
• the administrative obligations may be onerous.  They include arranging an annual audit of your fund, keeping appropriate records and reporting to the ATO on the fund’s operation;
• the annual charges for administration, accounting, tax and audit range can be expensive and between $2,000 and $3,000 for an average sized fund;
• you need to understand the responsibilities and requirements of being an SMSF trustee as you are responsible for ensuring the fund complies with its trust deed and superannuation laws; and
• you need to manage the fund’s investments in the best interests of fund members including for the sole  purpose of providing retirement benefits and keeping them separate from the personal and business affairs of fund members.

There is no rule of thumb as to how much that you need to have in super to cover the costs of running a SMSF, but I feel that a minimum of $150,000 is required to make it a worthwhile exercise.

As fund balances grow, property is becoming a very popular asset class in super funds.  According to the Australian Taxation Office, real property within SMSFs in has grown from $15.2 billion in 2003/04 to $61.3 billion in September 2010.

Whilst super funds can gear up to 75% (dependent on the borrower’s restrictions), consideration should be made for falling asset values and restrict borrowing limits to no more than 50%.  This means that if you have $150,000 in super, you should only be looking at property worth no more than $300,000.

Aside from having enough funds to be able to buy a property, some other issues to consider before owning real property in a SMSF include:

• you cannot live in the property owned by your SMSF for private purposes;
• commercial properties can be leased to a related business entity but only if there is a written lease in place;
• establishment and ongoing annual costs regarding administration of a SMSF will rise with having a property;
• whether your super fund has an adequate diversification of assets
• consideration of any liquidation of assets required should a member retire or die.
  
  

This article first appeared in the August 2011 issue of Your Investment Property Magazine www.yourinvestmentpropertymag.com.au. Copyright Key Media Pty Ltd 2011.